Possessory Interest Information and FAQs

Taxable Possessory Interests

A taxable possessory interest may exist whenever there is a private, beneficial use of publicly-owned non-taxable real property. Such interests are typically found where private individuals, companies, or corporations lease, rent, or use federal, state, or local government owned facilities and/or land for their own beneficial use.

Examples of Possessory Interests include such things as:

A boat dock on a public lake or river

A summer cabin on U.S. Forest Service land

Cattle grazing rights on Federal or State land

The variety and form of such interests vary widely and evolve continually, so identifying them all can be a very difficult task.

How do Possessory Interests differ from other assessments?

The valuation of Possessory Interests (PIs) differs significantly from other forms of property tax appraisal in that it is the appraiser's job to value only those rights held by the private possessor. The appraiser must not include the value of any rights retained by the public owner or any rights that will revert back to the public owner (the reversionary interest) at the end of a reasonable term of possession.

As a result, Possessory Interest assessments are normally less, and often significantly less, than fee simple assessments of similar, privately-owned property.

How does the Assessor distinguish which Possessory Interests are assessable and those which are not?

In order to establish whether such a use is subject to local property tax, the nature of the use must be carefully analyzed by the appraiser to determine, whether it meets certain specific requirements of the law set forth in Revenue and Taxation Code, Section 107, and Property Tax Rules 21 through 28.

In very simple terms, for a Possessory Interest to be taxable it must be:

Exclusive: Its holder must be able to exclude others from interfering with the use of the property, (or where there is a concurrent use, the concurrent use does not significantly interfere with the holder's use).

Independent: The use must be independent of the public owner. That is, its holder may exercise authority and control of the property apart from the rules and regulations of the public owner.

Durable: There must be reasonably certain evidence to show that the possession will continue for a determinable period of time.

Why are Possessory Interest holders being charged property tax in addition to the rent they pay the government? Isn't that really a form of double-taxation?

Those who receive Possessory Interest assessments are often puzzled and perplexed by the apparent paradox of on the one hand paying rent to a government entity and on the other being asked to pay property tax as well.

In theory, at any rate, the explanation for that circumstance is rather simple: Government entities do not have to pay property tax and thus their rent charges do not include an increment to recover such taxes (similar in that respect to a triple net lease). At the same time, the private possessor still receives the services and benefits (fire and police protection, schools, snow removal, local government) that other similar taxable properties enjoy and the Possessory Interest tax helps pay the holder's fair share of those costs.

In other words, Possessory Interest rents reflect only the public's return on its investment and do not include a property tax component. On the other hand, private sector rents include both the owner's return on investment and a property tax component to recover those taxes. As such, the separate collection of Possessory Interest tax does not result in double taxation.

How are Possessory Interests valued?

The Income Approach to Value is the most commonly relied upon method of valuing Possessory Interests.

If we understand the principle of anticipation, which holds that "the value of a property for a period of less than perpetuity is equal to the sum of its anticipated future income", the Income Approach becomes an important tool for valuing Possessory Interests. Where we can determine both economic rent and a reasonable term of possession, then to estimate the PI value, all we need to do is properly capitalize the potential rental income stream (less anticipated vacancy, collection loss, and management expense from a landlord's point of view) and the resulting figure is the taxable value of the Possessory Interest.

By capitalizing the economic net income for the term of possession, we have measured only those rights possessed by the tenant and have excluded any non-taxable rights retained by the governmental landlord.

When relying on the Income Approach, the appraiser must carefully determine three important factors:

Economic rent

A reasonable Term of Possession over which to capitalize the rent

A capitalization rate

In performing that analysis, the appraiser must determine the actual rent and whether it is in fact economic (market) rent (or, if no rent is being paid, what the market rent should be). A reasonable term of possession must also be estimated using such evidence as the actual contract or rental agreement itself, any history of prior use by the current tenant or the history of other tenant's use of the same or similar rights.

Why are Possessory Interests assessed on the Unsecured Roll?

Possessory Interests are normally assessed on the Unsecured Roll because the property rights being assessed are not owned by the assessee and cannot provide security for the taxes owed. In other words, the County cannot seize the property in order to satisfy any delinquent property tax.

Because of that, PIs are assessed as real property on the Unsecured Tax Roll but still fall under the umbrella of Proposition XIII. That is to say that although they appear on the Unsecured Roll, they are still assessed according to the laws pertaining to secured real property.

It is possible for a PI to be assessed on the Secured Roll but that is possible only in a situation where the Assessor agrees that property (buildings) built by a tenant on the publicly-owned land is by itself sufficient security for the taxes owed.

The payment schedule for Unsecured Tax Roll Bills is significantly different than for Secured Tax Roll Bills and taxpayers should be aware of that difference. Unsecured bills are due and payable in full no later than August 31 of each year. If paid after August 31, a penalty of 10% plus costs will be added to the amount due. Unsecured bills are not split into two installments with two different delinquency dates as secured bills are.

Where can I find additional information about Possessory Interest assessments?

Possessory Interest appraisal problems and philosophies are covered in much greater detail in Assessor's Handbook AH-517 The Appraisal of Possessory Interests. That publication can be purchased from the California State Board of Equalization and an order form (Purchase order for Law Guides and Manuals, BOE-663-B) can be obtained from the following sources:

If you have specific questions in regard to a particular Possessory Interest assessment, please call the Assessor's Office Customer Service Counter at 760-932-5510. Staff will put you in touch with the appropriate Possessory Interest appraiser.